Why you may be taxed like an employee, minus their protections

They will no doubt bear fruit for the Exchequer, but the taxman’s new rules to hit ‘false self-employment’ won’t offer employee-style protections to the workers they catch, despite making them employees for tax purposes, writes Graham Jenner, director at No Palaver Group.

This suggests HM Revenue & Customs has got into a bit of a palaver itself, as the department has actually cited the lack of employment rights for those who deserve them as a key reason for shaking up the rule book in the first place.

In fact, in its consultation -- which closed yesterday -- HMRC says that its proposed rules aim to tackle those “using employment intermediaries to disguise the employment of their workers as self-employment, primarily to avoid employer National Insurance and reduce the costs associated with workers’ employment rights.”

The Treasury is in line, saying at the time when the proposals first surfaced in Autumn Statement 2013 that the aim, at least in part, was to head off those who “deny employment rights to their workforce.”

False-self-employment: HMRC’s reasoning and response

The structure being targeted works by interposing an employment intermediary between the worker and the end user. The worker has a contract with the intermediary which is not an employment contract, usually by the insertion of a ‘right of substitution’ clause.  Since they are not an employee, they will be taxed on a self-employed basis.

As a result, the worker does not have the employment rights they would have had if employed directly by the end user. In addition, no employer’s national insurance is payable and the national insurance payable by the worker on a self-employed basis is lower than they would have paid as employee’s National Insurance. It is these two elements of the structure that the Revenue have concerns about and which the proposed legislation aims to address.

The department’s intention is that Chapter 7 of Part 2 of ITEPA 2003 relating to income tax treatment of agency workers will be amended (along with corresponding National Insurance rules), so that such workers will be treated for tax and national insurance purposes as being an employee of the agency. The most significant change is a rewording of Section 44 to ensure that a ‘right of substitution’ clause does not exclude the worker from the Agencies Legislation.

Where the Agencies legislation will not apply

The proposed legislation will not apply if it can be shown that the manner of the worker’s involvement in the provision of the services is not subject to (or to the right of) supervision, direction or control by any person. 

While control over the worker has been shown by case law to be an important element of employment, the strengthened legislation uses the wider wording “supervision, direction or control” and ignores other factors.  This means that those caught by the legislation will include those who would not be an employee within employment law.

HMRC’s guidance on the rules suggests that the legislation does not apply to those who are “genuinely self-employed”. But as there is no statutory definition of “self employed”, contractors and agencies will need to be wary of placing too much reliance on this. 

PSC contractors – not generally at risk

Despite this, contractors working through their own Personal Service Company (PSC) should not normally be affected by the proposed legislation to tackle ‘false self-employment.’ While the PSC is an intermediary for the purposes of the amendments to the Agencies Legislation, Paragraph 4.8 of the consultation document confirms that, as is currently the case, the legislation will “not generally apply” to PSCs. 

The reason for this is that all of the worker’s remuneration is not “in consequence of providing services.” The owner/director of a PSC generally receives director’s remuneration for being a director as opposed to remuneration in consequence of providing services. A law firm pre-empted this “out” from the proposed rules for genuine PSC contractors and, indeed, it is confirmed in the Employment Status Manual ESM2076, which HMRC recently published.

Where the proposed legislation does not apply, a PSC will still need to consider whether the Managed Service Company rules apply. If not, it must then consider IR35.

Being forced to pay tax as an employee won’t give you their rights  

While this confirmation by HMRC will no doubt please most PSCs, their hard-working counterparts have cause for less cheer, because such currently self-employed individuals will, from April, suffer “the worst of both worlds”: being automatically treated as an employee for tax purposes while getting none of the protections that employees get.   

It will be irksome to them that HMRC specified that one of the main reasons it wanted to tackle instances of false self-employment was that the self-employed were being denied the rights afforded to employees, such as holiday pay. Yet its proposals treat ‘falsely self-employed’ workers as employed for tax purposes only, meaning the rules will not result in greater employment protection for those who they catch.

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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